Carney risks clash at BoE over inflation target

Bank of Canada Governor Mark Carney has offered a glimpse of the policy ideas he might bring to the Bank of England when he takes over as governor next year - potentially opening a rift with current BoE rate-setters.

"There is no free lunch," Dale said. "There are costs and risks associated with QE. There are costs and risks associated with a commitment to levels of nominal GDP."

This is not the first potential area of disagreement that Carney - an unexpected appointee who is intended to breathe fresh air into the BoE - has with its current policymakers.

Before Carney was appointed, Andrew Haldane, the BoE's executive director for financial stability, accused him of an over-complex approach to setting international rules to safeguard financial stability, though Haldane has since played down any differences.

In his comments on Wednesday, Dale strongly defended the BoE's policy of QE, or quantitative easing, under which the central bank has bought some £375 billion of government bonds with newly-created money, a step Canada has never taken.

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By contrast, he focused on the negatives of committing to achieving a specific level of nominal GDP before raising interest rates, which aims to deliver a bigger boost to the economy than central banks' standard month-by-month approach to setting interest rates.

"What this policy means ... is that in two or three years' time as the economy starts to grow ... when you would normally raise interest rates, you don't - you let the economy overheat," Dale said.

As well as being undesirable in its own right, it could be hard to convince markets at the start of the policy that the central bank was committed to following it through, Dale said.

This would negate its upfront benefit of a downward push on long-term interest rates - the area where a policy of long-term commitment is said by its supporters to have an advantage over the BoE's current approach of deciding policy on a month-by-month basis.

"HOSTAGE TO FORTUNE"

The example that Dale described is at the extreme end of the possibilities that Carney raised, but London-based economists said similar criticisms applied to more general long-term commitments in monetary policy.

"It's tying yourself to a rule that may not be appropriate in time," said George Buckley, chief UK economist at Deutsche Bank.

Moreover, any change to the BoE's monetary policy framework may give the impression of a reduced commitment to getting inflation back to target, at a time when it has been above its 2 per cent goal for almost three years, he added.

Dale made a similar point. "I am happy in 10 years' time, when we've got inflation back to target and we've kept it there for a long period, to have a discussion about the inflation target. The one time you should not ever want to raise it is the time when you have trouble getting inflation back down."

Commerzbank economist Peter Dixon, who is more sympathetic to some of Carney's suggestions, also doubted whether British markets needed stronger guidance that interest rates are unlikely to rise any time soon.

"The BoE has been pretty good at communicating where the economy is. All you are doing by saying 'we will keep interest rates down unless X or Y happens' is you make yourself a hostage to fortune."

Economists polled by Reuters do not expect interest rates to rise before the second half of 2014 at the earliest.